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The Smart Take:
There’s an old school of thought that says you should take social security as early as you can so that you can get the most out of it. But this is another one of those retirement rules gone awry that we enjoy picking apart on the podcast. Kevin will tell us why this retirement “rule” needs to be scraped and give us the proper lens through which to view the social security problem.
This is the second of a five-part series we’re revisiting on Retirement Rules Gone Awry.
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The Host:
Kevin Kroskey – About – Contact
Walter Storholt:
Welcome to Retire Smarter. Walter Storholt here with you alongside Kevin Kroskey. And you know what? Now that we’ve done more than 90 episodes of this show over the past few years, it’s gotten to the point where we know that we’ve picked up a lot of listeners at various parts of the journey. Maybe you’re one of them. And many of you who weren’t around since the beginning have perhaps never gone back to hear some of our earlier episodes. Well, if you sure wish you could go back and catch some of the best past episodes, but maybe you don’t have the time to go consume every single one of them, well, you’re in luck. We’ve done some of the hard part for you. We’re going to give Kevin a few weeks off from taping fresh material to make it through the end of tax season here, and then he’ll be back of course, but in the meantime, we’ve assembled a special five part series, a retirement rules rewind, if you will, where we’ve selected episodes from our most popular series of the past.
Walter Storholt:
Now, these are going to be select episodes that deal with retirement rules that you’ve probably heard before, but we like to challenge those rules on this show and see if they truly should be called that. So we’re going to touch on subjects over the next five episodes that relate to everybody’s retirement planning. So there’s something here for everyone. And even if you had listened to these episodes way back when, well it’s been a few years, so never hurts to have a refresher. So sit back and we’ll rewind right into the meat of a previous episode as part of our retirement rules rewind.
Walter Storholt:
Part two of our series is Rules Gone Awry, taking social security early. We’re going to get into talking about social security. And this is continuing our series about some of the retirement rules that have been purported as rules before, and some of these that have gone awry over time. And there’s this one rule, Kevin, that says that you should claim social security as soon as possible. You’ve put into this account your entire life, as soon as you’re eligible, why wouldn’t you want to start getting your hands on that money? Why is that a retirement rule gone awry?
Kevin Kroskey:
I don’t even know if it’s a retirement rule, but it’s this default position that people seem to take. If they’re retired, they’re eligible to take the retirement benefit as early as age 62 from social security. And they just think like, “Okay, I’m retired,” you just go ahead and take your social security. And I think it’s just more, it’s that knee-jerk reaction. So I’ve been doing this for a while now. And back in the late 2000s, I was teaching a class, it was a retirement planning class, part of the Certified Financial Planner™ curriculum at a local college here in Northeast, Ohio. And I had to teach on social security. And one of the things that I was astounded about is I taught the 15 or so people that were generally in these classes, again these were all financial advisors seeking to become Certified Financial Planners™, was that even the curriculum that we were teaching, which was good curriculum, but it was just about the basic rules of how the system worked.
Kevin Kroskey:
And while those are all fine and good and important to know, where it fell short was actually using the rules and applying some strategies to get the most out of the system for the client. Squeezing the most out of what they paid in, incorporating into their financial planning and into their retirement planning, into their investment in tax planning, because it’s all interchanged. And that was just something that really stuck out to me. So going back then, not only was it a default for people that were retiring just to go ahead and take social security, but frankly, it wasn’t even on the roadmap or the mind of most advisors to even consider planning for it. And these were CFPs that I was training and only about 20% or so of the advisors were certified. And for anybody that doesn’t know what that means, basically, it’s like the equivalent of passing the bar if you’re an attorney or passing your medical boards if you are a doctor. So it’s new territory. And so you’re seeing change, but that default path is definitely 110% what you’ve seen for quite some time.
Walter Storholt:
Well, I know this debate about social security has raged on for a long time. Some people say you don’t want to take it too early because you want to maximize your social security. So take it, later on, others are on the other route. “Well, what if I pass away earlier? I’d rather have been getting for a longer amount of years, rather than a higher amount for a shorter period of time.” And I guess the bottom line is it’s hard to know exactly what this rule should be set at because you don’t know how long you’re going to live and it makes solving the rest of that equation pretty difficult.
Kevin Kroskey:
Yeah, it does. And you just hit on a few of the key points that you said. So when I think about this, I think of three or four different default actions or mindsets that people have. One is, they don’t think at all and they just say, “Okay. Hey, I’m 62. I’m going to take it.” The other is they think that “Hey, I’ve heard about this deferral thing and I realize the benefit could be higher in the future, but hey, I’m healthy now, I’m in my 60s now. Who knows what health I’m going to be in the 70s. I want to spend more money now and I don’t want to have to wait to spend money later, and I don’t care if the benefit’s going to be higher.” And I’ll come back to that and explain why that’s a bad mindset to have. The other one is, “It won’t be there for me.”
Kevin Kroskey:
And the last one, and so I guess this is four, four is, “I won’t let have a long enough to make the deferral to make sense. So I’ll go ahead and chalk those down one at a time.” So I won’t live long enough. We actually talked in podcasts episode three, I believe, about life expectancy. And we talked about how if you have that husband and wife who are both say age 62, and the only other condition is that they’re a non-smoker. On average, the second death is going to occur in the early 90s. So that’s another way to say that it’s going to be about 30 years on average that somebody’s going to be living and needing money. And the way that social security works as well is if you have a husband and wife and say you have two social security benefits, the higher the two benefits is going to be paid is long as either one of them lives.
Kevin Kroskey:
And so that’s known as a survivor benefit. So just to give a concrete example say one spouse is a $2,000 benefit per month and the other house has a thousand dollars. And the spouse with the $2,000 benefit passes away while the surviving spouse, I’ll say, her in this example, her a $1,000 benefit goes away. However, she steps into the shoes of her husband and receives the $2,000 per month. So there’s this inherent survivor benefit that’s built-in. And on average, people are going to live long for the deferral to make sense. So we won’t get in any mathematical calculations on the podcast and completely lose the audience. But certainly, the life expectancy for most people really is a non-issue. And if you want more information, go back and listen to podcast three about that. So we already talked about the don’t think at all, we talked about, “I won’t live long enough.”
Kevin Kroskey:
So the next one is, “Hey, I don’t want to wait to spend money.” So this is something that just people have this behavioral preference of spending, not their own money, but they prefer to spend social security. They prefer to spend their pension. These other income streams that they don’t have the flexibility over. I mentioned earlier that Dr. Michael Finka one of the things that he found in his study about retirement satisfaction is people are happier when they have pensions when they have social security to spend. The way that he measured, and I’m going from memory here is basically, they were about 50% more satisfied spending those income streams rather than dipping into their own investment accounts to spend the money. So the thing that I tell people is, “Look, if we’re advising you because we’ve run the numbers and we know that deferring social security for you is going to make sense, we’re not saying that you have to wait until you’re age 70 or 68, or whenever it is that we defer to go ahead and spend money.”
Kevin Kroskey:
No, absolutely not. What we’re saying is you can actually spend more money today at age 62 or whatever your age is that you’re retiring, and we’re planning to go ahead and recreate this retirement income stream for you. You can spend more today and you can spend more each and every year by doing it. However, you have to get over the emotional hurdle of using your own money for a period of time to bridge the gap until social security is going to start. And that’s tough for people. That emotional hurdle, it’s tough enough going into retirement after you’ve been saving in these accounts for 30, maybe 40 years, and then you get to retirement and you know you’re supposed to start pulling the money out, it has retirement right in the account name, but going ahead and just flipping that behavioral switch is difficult for a lot of people.
Kevin Kroskey:
So now we’re saying not only do you have to flip that switch of spending your own money, but you have to spend even more of it than what you otherwise would because you need to defer social security. That’s tough for people, but I can say, doing this for well over a decade now, we’ve had a lot of people that we’ve been able to help and make that smart decision to go ahead and defer and help themselves. So we’ve got three of the four downs. So some people just don’t think at all. And they say, “I’m just going to go ahead and default take it at 62 because that’s as soon as you can.” The second was, “I won’t live long enough.” So we already talked about that one, number three, “I don’t want to wait to spend.”
Kevin Kroskey:
And then the last one is, “Hey, social security, I don’t know if you heard, but they got some funding issues,” right? There’s something called insolvency and the social security trustees come out with reports every year. And hey, even if I look at my statement, there’s a little bit of a warning sign right under my expected benefit at age 62 or 67 or whatever it may say that the social security system is going to run out of money in the year 2034. Have you ever seen that on your statement, Walter?
Walter Storholt:
I have trouble just looking at the statement, just being sad that it might not be there when I get to retirement.
Kevin Kroskey:
Walter, my favorite millennial, I think I can help you feel a little bit better here. So let’s see what we can do. So back in, I think it was 2011, the system crossed over where it started paying out more money than what it was taking in. So social security’s funded by if you look at your pay stub and you see this, it says. FICA and you wonder, “Who’s this FICA person that’s taking 7.65% of my money?” So those benefits are being paid in, but more than what’s being withheld through the payroll taxes is being paid out in part because our country has an aging demographic. You have all these baby boomers, they’re retiring in ways, they have been for some time, people are living longer like we have already touched on. And so you got more and more people receiving these benefits for longer.
Kevin Kroskey:
And basically, this pay-go system being withheld through payroll taxes and being paid out is just not cutting it. So one of the things that I find really interesting, and again, we’re talking about finances, so give me a little grain of salt here, but back in 1983 was the last time that we had a major social security reform. And that’s when Reagan was in office and the person that was leading this was everybody’s favorite, Allen Greenspan. So everybody remembers uncle wow, and all the power that he had and how he would show up. And hey, what’s the federal reserve going to do? Well before he became federal reserve governor, social security was on target to go and solve it. And same sort of thing that I just described, where it was paying out more than what it was taking in. So they made this reform in ’83 and Alan Greenspan was chairing the committee.
Kevin Kroskey:
But a lot of people from the government accountability office said, “Hey if we make these changes, the system’s going to be solvent for about another 50 years.” Think about this. I said, 1983. So 50 years from that is 2033. And if you actually looked… One, if you were able to find your social security statement, but then actually look at it, it would say that the system is going to become insolvent again in 2034. So uncle Wow was almost dead on back in 1983. And actually, it was a little bit before that when they were doing the work, but the projections that they made were dead on. So this whole thing with social security being insolvent is nothing new. It’s something that’s been out there, something that’s been expected, and something that’s been dealt with before, frankly. And so how did they deal with it? Well, back in 1983, one of the things that they did was they increased the full retirement age.
Kevin Kroskey:
And so you being a millennial and frankly me being generation X as well, our full retirement age is age 67. And that applies to anybody that was born in 1960 or later. If you had somebody that was born in 1960, that was the most adversely affected by this legislative change of increasing the full retirement age. They were only 23 years old in 1983. So 1960 plus 23 gets it in 1983. So they had the entirety of their career basically to go ahead and account for this change in their social security benefit. And the reason why I think people should take comfort in that is one, it’s precedent. So I’m certainly not going to predict what Congress is going to do, but there has been precedent where they’re going to phase in changes like that over time. So that could certainly happen again.
Kevin Kroskey:
Any of the changes that people do put forward, which you don’t hear about it talked about all that often because it’s not exactly the most politically popular thing to talk about at least in public circles, usually, it’s age 50 or 55 and people that are older than that are not going to be affected by any of the changes. People that are younger than that are going to be affected. So again, that’s something that is out there, but social security in general frankly, it’s a relatively easy mathematical problem on what they need to do to fix it. It’s just having the political will to do it. So again, when you look at those four things about why I think people don’t make smart decisions on their social security, you can really distill it down to those four things. They don’t think at all, they just take the knee-jerk reaction when they retire or at 62, whichever comes later.
Kevin Kroskey:
They don’t think that if they’re going to live long enough, so they can’t really envision what is a reasonable life expectancy. So they’re not making the smart decision there. They don’t want to wait to spend, which is another way of saying they haven’t really… It’s a symptom of the problem. It’s not the problem. The real problem is it’s getting over the emotional hurdle of using their money that’s in their savings and investment accounts knowing that if you actually run the numbers, you’re going to actually be able to spend more throughout the entirety of the retirement, rather than just when social security starts. And then lastly, it’s that concern about it’s not actually going to be there for them.
Walter Storholt:
It’s a lot of different concerns to have on the top of your mind and trying not to fall into one of these pitfalls. Not having that fear that it’s not going to be there for you or that you’re not going to live long enough to enjoy the benefits and those kinds of things. I know that that can be very frustrating for people having so many different things to juggle there, but you do a nice job of laying out and disabusing some of these notions of the problems that surround social security to eliminate some of that fear.
Walter Storholt:
I think that’s important as well, as a follow-up to this, Kevin, what about, it’s not just a matter of flicking the switch. Okay, social security is now on. I know in the past there were all these different ways that you could elect or take your social security. Is that still the case? How has that maybe changed over the last couple of years, if somebody hasn’t been following closely to the social security addendums and rules and those kinds of things? Is that another layer to this whole equation?
Kevin Kroskey:
Yeah. I would say two things. For the purpose of our conversation today, we’ll probably just leave it largely at those four things that I touched on. And then there’s a lot more to unwrap about social security that we’ll touch on in future episodes. But to your point, there are different claiming strategies and there was the budget deal that was passed in late 2015 that included a social security change. And in short, without getting too technical, getting all these different claiming strategies, you had to be 62 by the end of 2015 in order to do something that’s called, basically restrict your application and only take a spousal benefit. So in short say if a common strategy that we actually have a lot of clients that are currently doing this because we incorporated it into their planning, we did the analysis and they were old enough to go ahead and use it.
Kevin Kroskey:
But somebody gets to their full retirement age, baby boomers are often that’s age 66, and they would go ahead and get to age 66. They would file for benefits, but they would restrict their application solely to the benefit of their spouse will benefit and not their own retirement benefit. And in short, that would basically entitle them to half of their spouse’s benefit who’s already claiming their own benefits. I know I just mentioned a lot of things there but going back to that example that I touched on earlier, say one spouse had a $2,000 per month benefit. The lower-income spouse had a $1,000 benefit. And let’s say that the $2,000 per month spouse gets to age 66, files that restricted application. So what do they get? They get half of the $1,000. So they have $500 a month, $6,000 a year.
Kevin Kroskey:
And they get that from 66 all the way up to 70. And well, what’s the benefit of going ahead and doing that? Well, they got that $6,000 per year. However, they also got an 8% increase per year on their own benefit. So over four years from age 66 to age 70, their $2,000 per month becomes… Doing some math in my head here, but a little bit more than $2,600 per month for the entirety of their lifetime. So that’s that a restricted application. It’s still out there, but you had to be 62 by the end of 2015. The other thing that changed and is important to know, and probably a good way we can wrap up our call today is that you used to be able to repay benefits. So this is a true story. In 2009, I had a client that I did the analysis.
Kevin Kroskey:
They had a lot of longevity in their family, and I did a calculation going through and showing them like, “Hey, I think you guys made a mistake on taking your social security early.” He did it, “I really didn’t think about it that way.” Smart guy, had the means, had some longevity, and I basically said, “You should really repay the $1,000 that you received in benefits over the last few years, go down to the social security administration, pay that back, and then we’re basically going to get a do-over and make sure that we do it right. This was in 2009. And sometime later, I saw the statistics and there was literally only 49 people in the entire country that repaid benefits similar to what I advised my client to do in 2009.
Kevin Kroskey:
So I guess like my mom always said I was a little bit special in recommending that they do that. And as you could imagine, if you’re going down social security administration and you want to write a check and repay your benefits, you’re going to get a blank stare at best.
Walter Storholt:
Probably.
Kevin Kroskey:
And that’s exactly what he got. And I wrote down in black and white exactly what they should do, sent him down to the social security administration with that. And he did repay benefits and that part was implemented. Well, the thing that he didn’t do though, and the thing that was not implemented correctly, he was also supposed to file a restricted application and take that special benefit that I just explained. And for this client, it was just a project work basically. There was no ongoing advice after the first few months of planning that I had done for them.
Kevin Kroskey:
And then he called me about two years later and he said, “Did you know I could have got a lot more money from social security?” And I went back and I looked exactly what I wrote, and then I asked him to send me his statement of benefits and what he was receiving. And that’s when I figured out that hey, what I wrote was exactly right, but unfortunately, it wasn’t implemented correctly. So two things I think are a good lesson for this. One, you can’t repay benefits similar to what I advised that client in 2009. So you need to get it right the first time. You need to run the numbers, you need to incorporate this into your overall planning. It doesn’t affect your investment planning. It impacts your tax planning, impacts your ability on when you’re going to be able to be financially independent and retire.
Kevin Kroskey:
So you need to think through and need to have a plan for this. Secondly, what we do now is basically we just file for benefits for our clients. They come into our office, we actually had a client here earlier today, and we were helping her file for benefits. Now, there’s a few kinds of filings that you cannot do online, but as a result of that implementation mistake, we just prefer to do the implementation ourselves. And actually, do it for the client rather than send them down to social security or have them go to the social security website. We do this probably 10 times a year for different clients. Anybody that’s listening to this is only going to file for social security once. So it’s just one of those things. You want to make sure it’s going to get done right and you don’t have a chance to do it over like you used to.
Walter Storholt:
Well, if you have any questions whatsoever about your social security, how to take it, there’s one way you can take it, claim your social security as soon as possible. That’s just one way. And often that’s not the right way for you to do it. So be aware of that. If you thought that was a retirement rule, it’s one that has definitely gone awry. And you heard the litany of reasons why that’s the case. Obviously Kevin and his team, very knowledgeable on this subject. They’re standing by to help you navigate through some of these questions. If you have some about your own social security, how it fits into your overall financial plan, the best way to get in touch, the best way to set up a time to chat is to go to truewealthdesign.com.
Walter Storholt:
That’s truewealthdesign.com, click on the, are we right for you button to schedule your 15-minute call with an experienced financial advisor on the true wealth team serving you throughout Northeast Ohio. That’s truewealthdesign.com. And you can always call as well, 855TWD Plan, 855TWD Plan is your number to dial. Kevin, I just asked you that follow-up question, because I’m going to use a millennial term here. I wanted to hear you drop some knowledge some more on social security and you took it and you ran with it, man. That was great.
Kevin Kroskey:
Walter, I have no idea what you just meant to say, man.
Walter Storholt:
Come on. You gave us all the down-low. No, that was still probably millennial too, wasn’t it?
Kevin Kroskey:
I know what you’re saying, Walter, and you are definitely atypical for the stereotypical millennial.
Walter Storholt:
You gave us the whole story. Who am I thinking [crosstalk]?
Kevin Kroskey:
I gave you the truth and nothing but the truth.
Walter Storholt:
There you go. We’re taking away back now. That’s right. Very good. All right. Well, there’s your way to get in touch with Kevin Kroskey. Don’t forget truewealthdesign.com the website to go and check out. Kevin, thanks so much for joining us on the podcast today and making a topic like social security interesting. And I enjoy actually hearing all the different layers and intricacies that there are because some people think it’s just so simple, but there are a lot of different things to consider, and you broke it down well for us, we appreciate it.
Kevin Kroskey:
Yeah. Thank you. Real quick, I have a few clients that are in their seventies and defer until 70. And a few of them are just asked them, they’ve been very happy with a deferral. They’ve also said that they don’t tell anybody what they did because the few times that they’ve tried to tell people, they just get such a backlash and have a tough time explaining the benefits to them. More is being written about it, but it’s still pretty much undercover for most people. And even if it’s talked about, it’s not being done. So certainly something that can add a lot of value. Six figures is not uncommon for a married couple if they’re going to do their social security planning right. Six figures more than what they would’ve otherwise received. So definitely big numbers.
Walter Storholt:
Absolutely. Again, truewealthdesign.com, your place to go to set up a time to chat with Kevin and the team. Just click on the, are we right for you button. We appreciate it, Kevin, thank you very much. And thank you for listening to the show today. If you thought the information today was helpful and might help someone that you know, or maybe a friend or a family member, send them the podcast, copy the URL, or hit the share button if you’re listening on the app and send it to somebody that you know if you think it might help them as well. Thanks for joining us, and we’ll talk to you next time on Retire Smarter.
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